Finding the Right College Savings Plan
By Michele Blandino
For most of us, the prospect of saving for our children's college education is overwhelming. According to statistics provided by College Board, the average cost for tuition and fees at a private college during the 2003-2004 academic year is $19,710. Public colleges check in at $4,694. Add another $5,000 - $12,000 for room and board and you are looking at a pretty hefty price tag. Now, imagine what that price tag will be when your child is ready to enter college.
Enter the 529
The 529 Savings Plan was developed to help make this task a little easier. Named for the section of the Internal Revenue Code that gives approval for savings plans of this type, 529 plans have seen a recent rise in popularity, even though they have been in existence (although not widely used) since the early 1990's. Originally conceived as a way for parents to save money to be used toward tuition at a public (i.e. state) college, 529 plans were first seen in Michigan, Florida and Wyoming. After being made legal by Congress in 1996, they became available in all 50 states.
SavingforCollege.com has one of the more comprehensive listings of the plans available in each state.
Today, plans are sponsored at the state level and are generally available in two forms: the college savings plan and the pre-paid tuition plan. The features of each plan vary from state to state. Some states offer federal and/or state tax deductions for 529 account contributions; others give an exemption on states tax on earnings that are withdrawn, still other states offer matching grant or loan programs. As if this weren't confusing enough, things become even more complex when you consider that you do not necessarily need to be a resident of a particular state to participate in their 529 plan.
The Benefits
The biggest draw of the 529 account is that the earnings on your contributions remain free from federal income tax when they are withdrawn to pay for higher education expenses. Second, 529 accounts can be opened by anyone, for anyone. In other words, grandparents can open 529 accounts to benefit their grandchildren, you can open one to benefit a friend's child, you can even open one to benefit yourself if you think you might be returning to school at some point. And, if the child for whom you open the account decides to not go to college, or, if not all of the money in the account is not used by the time the child finishes their education, the money can be transferred to the benefit of another child, as long as that child is in the same family.
When the money does come out of the account, it is taxed at the beneficiary's (the student) tax rate which is generally lower than that of the parents. Money contributed to a 529 account also qualifies for the annual gift tax exclusion (which is currently $11,000 annually, $22,000 for those filing a joint return). And, during the year the account is established, a total of $55,000 can be contributed without exceeding the gift tax exclusion.
The Fine Print
As with all good things, there are some points to be aware of. First, there is a 10% penalty on funds that are withdrawn and used for something other than higher education expenses. Second, the amount of financial aid your child receives may be affected by the balance of the 529 account. Third, you are not permitted to direct the investment of the assets in the plan - this is done by the investment manager that sponsors the plan.
Taking the time to investigate the available options will allow you to find a plan that works best given your particular circumstances.